Gold Price Drops to the Lowest in a Week on Fiscal Cliff Deadline

on Dec 13, 2012
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On 13 December 2012, Reuters reported that gold declined about one percent, dropping below $1,700 and triggering stop-loss selling. The precious metal declined despite the announcement of the US Federal Reserve that it will introduce further economic stimulus, which is generally supportive for gold. Instead, investors focused on the US budget deadlock, with the White House and Republicans failing to agree on how to avert the looming fiscal cliff.

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**Gold Slumps on US Budget Deadlock**
As reported by Reuters, spot gold declined one percent to $1,693.80 an ounce before clawing back some of the losses to stand at $1,699.20. The most active US gold futures contract slumped 1.3 percent to 1,695.5 an ounce, later recovering to $1,701.40.
“Investors are now focused on the fiscal cliff negotiations, which are looking protracted and threatening to weigh on all markets,” noted Xiang Nan, an analyst at CITICS Futures Co, as quoted by

Bloomberg. “We view a drop below $1,700 as a good buying opportunity. The Fed sent a strong signal about supporting the economy and keeping the easy monetary policy stance unchanged, which should support higher gold prices in the longer term.”
**Fed Stimulus with Less Impact**
Analysts, however, had expected the Fed’s “signal” to lift gold, especially given the impact of the announcement of its third round of quantitative easing which sent the precious metal soaring in October. Gold is up almost nine percent this year, with central banks around the world introducing stimulus to spur growth, which in turn prompts investors to seek safety in hard assets.

On December 12, the Fed announced that it would purchase $45 billion a month of Treasury securities to boost the economy, linking the programme to unemployment and inflation thresholds. “This announcement is a bit confusing to gold investors as it linked policy to unemployment, etc.,” noted a Tokyo-based trader, as quoted by Reuters. “Perhaps the market wanted unlimited QE.” Bloomberg in turn quotes Goldman Sachs Group (NYSE:GS) as saying that the Fed’s additional balance sheet expansion was already “priced in”.

!m[Fed Stimulus Announcement Seen As “Confusing” ](/uploads/story/1027/thumbs/pic1_inline.png)Reuters reports that gold is seen as remaining rangebound with the difficult US budget talks keeping investors away from big bets. “The near term risk is a stronger dollar,” points out Jeremy Friesen, commodity strategist at Societe Generale (EPA:GLE), as quoted by Reuters. “The ‘fiscal cliff’ is going right to the end, and that could support the dollar and take some shine off gold.”

**Asian Demand**
On December 13, Reuters market analyst Clyde Russell noted that gold analysts were heavily focused on quantitative easing in the US while ignoring the physical market, and particularly gold demand from India and China. Mr Russell notes that positive factors such as the US monetary policy and central bank buying “have had to swim against the tide of weaker demand from India and China.”
As reported by the World Gold Council, gold demand in the third quarter of 2012 declined 11 percent relative to the same quarter of 2011, with the drop “blamed” on Chinese consumers whose appetite for gold fell at the fastest pace in almost a decade. Indian demand, however, has recently recovered on account of lower prices and a stronger rupee.
Reuters quotes traders as expecting physical demand to pick up after prices have dipped below $1,700 level, although it is not seen as enough to offset all investor selling.

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Commodity Precious Metals